Freedom to Contract Prevails in New Mexico

Is freedom to contract a good thing for everybody?  First Baptist Church of Roswell v. Yates Petroleum Corp. says yes, and confirms that the public policy in New Mexico is freedom to contract. In this case, it was to avoid the Proceeds Payment Act requirement for payment of interest on well proceeds once a legal determination is made that a payee is entitled to the funds.

The Contract and the Statute

Yates refused to pay interest on unpaid royalties pursuant to a division order signed by the royalty owners authorizing payment without interest if a delay resulted from a question about their marketable title.

The royalty owners asserted their right to interest on the proceeds notwithstanding the division order. The district court agreed, finding that the division order violated Section 70-10-4 of the Act, declaring the agreement void, and requiring Yates to pay interest on proceeds paid after statutory deadlines. The court relied on what it said was the plain meaning of the statute.

The New Mexico Supreme Court had ruled under a 1985 version of the Act that in division orders which contractually waive interest payments no interest was owed. That version read, “which deposit shall earn interest.” In 1991 the Legislature amended the section to say “the payee is entitled to be paid the principal plus statutory interest.”

The Court’s View

The appellate court in Yates disagreed, with this rationale:

  • Both the 1985 and the 1991 statutes had mandatory interest terms.
  • There is the strong public policy of freedom to contract
  • Nothing in the plain language of the statute explicitly articulates a fundamental public policy that payment of interest is of such importance that its payment cannot be waived.
  • Modification of a statute to provide for a benefit does not establish the Legislature intended that the policy in the statute will, in all cases, outweigh the parties’ right to contractually modify or waive the benefit.
  • When the Act was first passed, the Legislature granted a contractual right to alter the date payment is due, meaning they also granted freedom to determine when interest commences.
  • When the Legislature amended the Act in 1991, it did not prohibit division orders from waiving interest while a title question was unresolved. Presumably, that means the revision is consistent with both the prior case and the prior legislation.
  • Allowing the parties to contractually waive interest did not manifestly injure the public, especially considering that generally, the failure to accrue interest is attributable to the interest holder’s delay in proving marketable title, and not any action of the payor.

Takeaway and Three Queries

Many division orders have this waiver. Most payors are loath to allow the royalty owner, in his unfavorable bargaining position, to redact it.

Query:  Why must the producer pay interest when a title defect, in any case we can think of, is not his doing?  One answer: He is collecting interest on money that isn’t his. It belongs to the royalty owner. The court didn’t see it that way.

Query: What will the legislature do next in this statutory tug-of-war?

Query: Is it just our imagination, or is this ruling bad for royalty owners?  This musical interlude can help:  A cover song by the World’s Greatest Rock and Roll Band that is way better that our last one. Here is the incomparable original and the reinvention.

Topics:  Contract Disputes, Interest Payments, Oil & Gas, Royalties

Published In: Civil Procedure Updates, Civil Remedies Updates, General Business Updates, Energy & Utilities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Gray Reed & McGraw, P.C. | Attorney Advertising

Don't miss a thing! Build a custom news brief:

Read fresh new writing on compliance, cybersecurity, Dodd-Frank, whistleblowers, social media, hiring & firing, patent reform, the NLRB, Obamacare, the SEC…

…or whatever matters the most to you. Follow authors, firms, and topics on JD Supra.

Create your news brief now - it's free and easy »